Dover Corp (DOV), Honeywell International Inc. (HON) Among These Three Multi-Industry Companies on the Move

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Multi-Industry players have received a mixed treatment from the market. Some have held a bullish stance on these stocks on the basis of strong ISM numbers (ISM is a manufacturing index), growth in non-residential construction sector, improvement in freight data and so on. However, on the other hand, bears haven’t been happy with how the Chinese economy has grown this year and they have found some valid reasons like the soft mining market and weak European economy to believe that the multi-industry might be in for a dip this year.

The ongoing earnings season has provided us with a unique opportunity to gauge the future performance of this industry on the basis of analyzing earnings previews as well as earning calls (once the company announces its earnings results).

W.W. Grainger, Inc. (NYSE:GWW)W.W. Grainger, Inc. (NYSE:GWW) was the first of the lot to announce its earnings on April 16. The company managed to beat the EPS estimate of $2.74 by posting an EPS of $2.94. However, the company missed the revenue estimate by $10 million. The distributor of lighting and power tools has had a strong but uneventful quarter. Despite the tough comp in this quarter (1Q12 US organic growth was 10.6%), the total organic growth is expected to come in at 5.8% for 2013, which will be in line with the mid-point of the company’s 2013 guidance. However, a 20% rally since the start of the year, that suggests that this stock might be a mouse-trap. The company, despite having margins at record highs, might be a perpetual under earner and the upside might already have been baked into the stock.

The stock has rallied 7% since the earnings release. The bullish interest has been because the company improved its EPS and revenue guidance for 2013. The guidance has been improved on the premise that the company expects incremental revenues due to improvement in housing market (the company is a supplier of HVAC equipment).

However, Longbow’s action of downgrading the stock to Neutral seems plausible given the enormous gains that the stock has lately been witnessing.

Dover Corp (NYSE:DOV), however, is a separate story altogether. Given declining rig counts, tough P-Fresh comparisons (P-Fresh was one of Target’s campaigns in which Dover Corp (NYSE:DOV) was the supplier) and the belief that Sound Solutions will turn profitable in 2H13, 1Q is expected to be the weakest quarter in the year. The company topped the earnings estimates by $0.01 and posted an EPS of $1.10. However, the revenue of $2 billion fell short of analysts’ estimates of $2.07 billion.

The stock is down 4% since the earnings release on April 17. However, despite the revenue miss, the stock is poised to grow.

Sound Solutions (a smartphone company before Dover Corp (NYSE:DOV) acquired it) has been the main focus for most of the analysts. Many now expect sequential improvements in both revenue and profitability. Though there are still many headwinds but a management change and acceptable manufacturing yields gives an indication that Sound Solutions might be turning the corner. Demand for smartphones is high and is expected to show robust growth through 2014. There is at least $0.08 upside to the EPS in case this division is able to meet the company’s guidance of achieving high teen margin by 2014. No reason why Goldman has placed this stock in its basket of “must-buys.”

Honeywell International Inc. (NYSE:HON) is the next multi-industry player to report this week on April 19. The 1Q EPS estimate of $1.14 is at the high-end of guidance ($1.10-$1.15). However, a $0.01 currency benefit, conservative guidance on Automation and Control Solutions (ACS) segment, and strong Performance Material & Technology (PMT) revenues/margins due to the timing shift in catalyst shipments from 4Q12 to 1Q13 might help the company to top the consensus estimates. Also, the ongoing Organization Efficiency Program (better known as OEF since Honeywell International Inc. (NYSE:HON) likes using acronyms!) will help the company to improve its bottom line. Three things make the stock a buy:

1) conservative guidance on ACS segment (as stated above)

2) Overstated concerns regarding margins being at peak levels

3) Overly conservative FX guidance (especially for euro)

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